Corning: Morgan Stanley Ups to Hold on ‘Pivotal’ Year for Touch Laptops

By Tiernan Ray

Shares of Corning (GLW) are up 11 cents, or 0.8%, at $15.21, after Morgan Stanley’s Ehud Gelbum this morning raised his rating on the shares to Equal Weight from Underweight, and raised his price target to $16 from $13, writing that the arrival of touch-based screens for mainstream laptop computing could lift sales of its “Gorilla Glass” business, while several factors, including more stable prices for liquid-crystal displays and a bottoming of the Japanese Yen will provide some support to the stock.

Gelblum raised his estimate for Corning’s Gorilla Glass business for this year to $1.37 billion in revenue from a prior $1.16 billion estimate, which he points out is 31% growth, versus his prior 10% estimate. He notes the company said at its analyst day in February that Gorilla can be a $2 billion to $3 billion business by 2016.

Driving his estimate for this year higher is the advent of so-called cover glass for notebook computers:

We estimate that cover glass shipments nearly triple over the next three years, from ~7M square meters in 2012 to ~20M in 2015, assuming 60% of consumer notebooks go touch and rely on a cover glass (we are assuming no corporate notebooks go touch). Even if adoption of touch on NBs remains de minimis, at ~20% in 2015 from ~3% in 2012, the cover glass market would still increase ~130% in size to ~16M square meters by 2015, implying that the growth of smartphones and tablets, along with screen size expansion for smartphones, dwarf the impact of touch adoption in notebooks. However, 2013 is a pivotal year for the cover glass market, as touch notebooks take-off on the back of the [Microsoft (MSFT)]Windows 8 ramp, sustaining the strong growth Gorilla enjoyed in 2012, and much higher than the 10% y/y revenue growth we have been modeling for this year until now. Indeed, we model touch notebooks driving 45% of the incremental demand for cover glass in 2013 vs. 28% for smartphones and 27% for tablets. There is a secondary benefit to Corning’s success with Gorilla. Since Gorilla and LCD glass share the same production sites, a rapid increase in Gorilla production has had the net effect of removing capacity from the LCD system, and can therefore potentially lead to stronger LCD glass pricing. We anticipate the 2H’13 surge in Gorilla (>100% increase in H2 vs. H1’13) to help sustain the currently favorable LCD pricing environment by constraining LCD supply.

That helps place his full year estimate for Corning at $8.2 billion and $1.32 per share, versus his prior estimate for $7.985 billion and $1.26 per share.

LCD glass prices seem to have some support against further declines given contracts put in place, writes Gelblum:

The risk of another LCD glass price shock is limited in the short term, as Corning’s new contracts put in place last Fall and valid until the end of Q4’13 appear to be working, with both Corning and NEG expecting further improvements in the glass pricing environment next quarter, while stable TV demand and screen size expansion combined with the lack of new capacity are leading to an improving supply/ demand balance.

Despite all that, Gelblum still thinks it’s difficult to make an investment case for the stock:

We continue to believe that the secularly challenged Display business makes the stock difficult to invest in for the long term. We believe the stock could be pressured again as Corning needs to renegotiate its contracts with panel makers at the end of this year, while the Yen hedge rolls off at the end of 2014 forces numbers lower in 2015 and beyond. Our 2015 EPS estimate (based on Corning rehedging the Yen at 100) is $1.18, down $0.20 from $1.38 in 2014, but clearly could be lower if the Yen continues to depreciate.

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